AASB 131 Interests in Joint Ventures is to be replaced by a new standard with the proposed title of Joint Arrangements. The new standard is expected to be released by the IASB next month.

Under both standards, a key principle in identifying a joint venture (or joint arrangement) is the existence of a contractual arrangement that requires the unanimous consent between the parties in relation to the strategic financial and operating decisions of the activity. Where such an arrangements exists, the proportionate interest of each venturer is not a relevant consideration.

Example

XYZ Pty Ltd has a wholly owned subsidiary EFG Pty Ltd. EFG needs funding, and has received interest from VentCap Ltd who has agreed to inject capital that will represent a 20% equity interest in EFG on the condition that VentCap has equal representation on the board of EFG at all times. An agreement is signed to facilitate the arrangement and requires all strategic financial and operating decisions to be approved by both XYZ and VentCap directors.

Despite VentCap having a 20% interest, XYZ will need to derecognise its interest in EFG as a subsidiary and account for EFG as a joint venture from the date of the arrangement.